Regulatory Oversight 4: Guide to Communities Considering Hospital Conversion in the Carolinas

While the activities of the DOJ and FTC protect against true anticompetitive activity, the agencies have also recognized the "pro-competitive" nature of hospital integration. As such, they have released statements of enforcement policy (see Statements of Antitrust Enforcement Policy in Health Care, August 1996) describing certain "safety zones" for hospital integration agreements that will not be challenged on an anticompetitive basis (e.g. mergers and joint ventures involving expensive medical technology). The guidelines restrict use of these safety zones to smaller hospitals with an average daily census of fewer than 40 patients over the past 3 years, and an average of fewer than 100 licensed beds. By setting these limits, the Agencies state that affiliation may offer these hospitals efficiencies that may enhance their economic stability, which they are otherwise not likely to benefit from, unlike their larger counterparts.

What is the Role of Individuals in Antitrust Regulation?
Affected private parties may sometimes bring suit in federal court to prevent a merger agreement based on antitrust violation. A private party may also recover triple the damages suffered by such a transaction.46 Individuals may also bring suit against a hospital or health system under state antitrust statues, which may offer a broader basis for a lawsuit than federal antitrust statutes.34

Who Must be Notified of a Pending Conversion?
Timely review of transactions is assured by the pre-merger notification provisions of the Hart-Scott-Rodino Antitrust Improvement Acts of 1976, requiring the Agencies to be notified in advance of proposed mergers or acquisitions. Each of the hospitals intending to merge meeting certain threshold levels (including minimum total asset, percentage being acquired or value of proposed acquisition) must file with the Agencies.48

Many hospitals voluntarily notify the FTC and DOJ of a proposed agreement, including all necessary paperwork, yet wait to file the pre-merger notification, as this begins the official time limit for the government investigation. Once pre-merger documents are filed, parties must wait 30 days to consummate the agreement. At this point the DOJ and the FTC may either decline to contest the deal, challenge it in court, or request additional information to conduct a more detailed investigation.

* Scrutiny for antitrust violation at either the federal or state level was virtually absent in the case study hospitals, as the acquirer typically did not own other hospitals in the immediate area. In the Cleveland Regional Medical Center case, the decision to lease the hospital was necessary for the lessee and lessor to continue to integrate their services as they had been doing. Through a lease arrangement, the two hospitals felt they could be considered as one organization for purposes of contract negotiations and the like. When simply linked through an alliance, antitrust issues would not be raised for the hospitals, but closer collaboration was thought to have potential antitrust problems.

State-Level Antitrust Review
In addition to federal statutes, hospitals undergoing conversion must also comply with individual states antitrust statutes, typically based upon their federal counterparts. Under the jurisdiction of federal law, individual states may take action to block mergers in federal court, even if these proposed agreements are not challenged by the FTC or Justice Department.49

Although antitrust statutes are in effect in North Carolina and South Carolina to regulate the health care industry, each state has recognized the potential good of cooperative agreements between health facilities that might otherwise be deemed anticompetitive and prevented at the federal level. According to South Carolina's Health Care Cooperation Act the consolidation of hospital entities in various ways may help to improve quality and access to health care services in rural areas, moderate price increases, and enables rural hospitals to remain in operation. Both this Act and its companion North Carolina statute may exempt health care providers from antitrust enforcement if they can prove that the benefits of such consolidation outweigh any risks to free market competition. In North Carolina, the exemptions provided by the Health Care Cooperation Act apply to the purchase of assets pursuant to a merger, sale, partnership, joint venture or any other affiliation transferring ownership or control of all or substantially all of the stock, assets or activities of persons having hospital control. Similarly, South Carolina's Health Care Cooperation Act applies to cooperative agreements between "two health providers…for the sharing,…allocation of personnel;…medical diagnostic or laboratory facilities, procedures, equipment…or the acquisition or merger of assets."

How Does a Hospital Apply for State Antitrust Exemption?
To take advantage of these exemptions, a hospital must file for a Certificate of Public Advantage (COPA) with the Department of Health and Human Services (DHHS) in North Carolina or the Department of Health and Environmental Control (DHEC) in South Carolina. Those applying for a COPA in North Carolina also must submit a copy to the state Attorney General. In South Carolina, this information is forwarded by DHEC to the office of the Attorney General. In North Carolina, DHHS approval of COPA can be overridden if the Attorney General determines the applicant has not demonstrated sufficiently that the agreement's benefits outweigh the risks that may result from a reduction in competition. In South Carolina, the Attorney General provides an opinion whether to approve or deny, but the final decision is left to DHEC. These decisions may be based, in part, by finding that one or more of the following benefits: improvements in quality, efficiency, lower costs, avoidance of service duplication, the preservation of health care services in their traditional communities and maintenance of hospital utilization by under-served populations. Evaluation of the disadvantages of an agreement in North Carolina may include potential price increases and decreases in quality, accessibility, and the ability of hospitals to negotiate appropriate reimbursement arrangements with health maintenance organizations and other health care payers. In South Carolina, a judgment may be based on whether a reduction in competition is necessary to obtain the likely benefits of such a cooperative arrangement.

In both states, to ensure the exemption is justified, providers must accept certain state monitoring requirements and restrictions. Such restrictions may include limits on prices, revenue, profit, and allowable business dealings with physicians and third party payers.

* The Certificate of Public Advantage (COPA) antitrust exemption was used for the first time in North Carolina in the merger of St. Joseph's Hospital and Memorial Mission Medical Center, the only two private acute care hospitals in Asheville, North Carolina. The partnership had been under investigation by the Department of Justice, but was issued the COPA only after a detailed application process demonstrated the benefits of the agreement between the two hospitals, including avoidance of duplicative projects, reduced operating costs and improved regional network building potential.53
* Baptist Healthcare System and Richland Memorial Hospital (Columbia) were the first hospitals in South Carolina to utilize the COPA in their merger proceedings, resulting in a combined entity comprising at least 63% of the market in Richland and Lexington counties. The COPA was issued to the hospitals only after a five-hour public hearing, and the inclusion of provisions to assure South Carolina Attorney General Charles Condon of monitoring to verify continued hospital provision of charity care. Also at issue in the review process were concerns that patients at the two other hospitals in the region retain access to services offered exclusively by the newly combined entity, and the restriction of exclusive managed care contracts that might limit the ability of other area hospitals to do business with these companies.

The Attorneys General in North and South Carolina have not been as active in the area of hospital conversions as their counterparts in some states. However, this role has adapted accordingly as more hospitals in each state have opted to undergo conversions.

In keeping with the expectations of federal antitrust regulators that state regulators be actively involved in cases of state-level antitrust exemption, the Health Care Cooperation Act has been a driving force in the role of the Office of the Attorney General in South Carolina in antitrust review. Throughout the process of approving the COPA for the merger of Richland Memorial and Baptist Healthcare System in South Carolina, the Office worked closely with the South Carolina Department of Health and Environmental Control (DHEC) to review the agreement and develop the mandatory compliance review system.

In North Carolina to date, there is not a unit with comprehensive oversight of hospital conversions. Rather, this review is handled by several departments within the Office of the Attorney General based on two areas of focus: 1) preservation of charitable assets (through the NC Department of Revenue); and 2) violation of antitrust statutes (through the NC Department of Consumer Protection and Antitrust).

According to the North Carolina Office of the Attorney General, the sale or lease of one not-for-profit hospital to another not-for-profit would not require a review by the Attorney General's office to assess preservation of charitable assets, since the purchaser/lessor is also organized as a not-for-profit; under existing law, the issue of community control has not been relevant in such cases. However, such a sale (not-for-profit to not-for-profit) is not precluded from being reviewed to assess the antitrust issues inherent with market consolidation.

The North Carolina Office of the Attorney General presently is moving to formalize their review of hospital conversions in North Carolina under the direction of the Consumer Protection and Antitrust Divisions. A lawyer is to be hired in 1998 to spearhead this effort and provide a comprehensive assessment of future conversion activity in the state.

In sum, antitrust review does not purport to judge the entire scope of impact of hospital consolidation on a community. Rather, the review of a proposed conversion on antitrust grounds is limited to examining its potential to affect competition in the hospital market. In antitrust review, no consideration is given to the fairness of the merger terms or on the impact of the conversion on care for the indigent or other community concerns.4 Those considering hospital conversion therefore must realize that antitrust review serves as only one valuable piece of the regulatory process, which combined with other mechanisms, ensures that the transaction most appropriately benefits the community.